Understand ETF investing
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Understand ETF investing

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Description

ETFs can help when diversifying a portfolio. Learn more about ETF investing, passive investment, and how to create consistent trading strategies.

Transcript

If you’re looking for ways to diversify your portfolio, I’ve got 3 letters for you.

E.T.F

Not sure what an ETF is? 

An ETF is like a basket that can hold a mix of things like stocks, bonds, commodities and other assets — all in one place.

When you’re buying an ETF, you can gain exposure to everything inside it without having to select and invest in each asset individually.

An ETF has a couple of advantages that you need to be aware of, so let’s dive into it.

Here are some of the pros of ETFs

Number one. Diversification.

ETFs allow investors to get diverse exposure to entire sectors as a whole instead of specific assets.

This allows investors to increase their diversification.

For example, let’s say you buy 3 ETFs from different sectors that each have 30 companies in it. That means with those 3 ETFs, you’d be diversified across 90 assets spread over 3 sectors.

Number two. Skip market stresses.

ETFs are a passive way to invest because they do the rebalancing of the positions for you. This “Buy & Hold” method for the long term allows investors to stop tracking their portfolios on a daily basis, and be less stressed about the volatility in the market.

Number three. Consistency.

ETFs can be used to do dollar-cost averaging, a common investing strategy where investors buy the same dollar amount each month.

This allows them to avoid timing the market, by having consistent and small investments and, average down the cost when markets are declining, since they are buying more shares at a lower price.

And number 4, My favourite: time.

If there are sectors you don’t know anything about, or perhaps don’t have the time to analyse each individual company, but you still want to be exposed to them, you might consider investing in an ETF that covers that sector.

For example, if that was the real estate sector, then you might consider investing in an ETF like this one. 

It literally consolidates 35 different leading house builders into one single asset.

So, we’ve covered 4 reasons to consider investing in ETFs. But what’s the risk?

Well, as with any trading asset, an ETF is exposed to volatility, which will depend on the particular ETF’s exposure. However, it is worth noting that a widely diversified ETF will be much less risky than buying one single asset.

You can explore and read more about ETFs you may be interested in on the eToro Academy.